(f) none of the nominated assignee entities had any real commercial reason or incentive (in the sense of a desire to avoid or minimise loss) to interest itself in the financial affairs of Kimberley or the recoverability or otherwise of the assigned debt.
48 Mr Lorentz was at pains to say in his evidence that "there was no written or verbal agreement with any of these people that I would get a vote" - that is, that there was no agreement that "these people", having become the assignees (by means of financial outlays by Selwan) of Kimberley debt, would then act as Mr Lorentz ("I") or Kimberley's directors (who had engineered the assignments to them) might direct or desire concerning creditor voting.
49 It is, in my opinion, impossible to hypothesise any other plausible reason why the several assignees should have participated in the way they did.
50 There is no direct evidence as to whether the assignees were approached before Selwan made the payments to the bona fide Kimberley creditors and had those creditors assign their debts to the several nominated assignees. But there is an irresistible inference that they were; and that each had agreed to co-operate with Selwan before Selwan approached the bona fide creditors. I say this because each letter from Selwan to a bona fide creditor identified the relevant assignee: see paragraph [35] above. Selwan would not have nominated someone as assignee unless it knew that that person was willing to play the envisaged role.
51 All the assignees, without exception, afterwards made proxy appointments in favour of Mr Lorentz and Mr Burke. There was, of necessity, communication between someone in the Kimberley/Selwan camp and each assignee at or before that point. Apart from anything else, no assignee would have been aware that the debt had become vested in it unless informed by someone else, given that the assignments were arranged, procured and paid for by Selwan.
52 On Mr Lorentz's evidence, the probability is (and I find) that it was Mr Burke who made each such communication and that, in each case, the communication was made before Selwan wrote to the external creditor of Kimberley with the request that the assignment be executed. None of the assignees had any incentive of its own to appoint anyone as proxy to vote for it at a meeting of Kimberley's creditors.
53 The directors and the secretary of Kimberley, in their capacity as directors and secretary of Selwan, deployed the financial resources of Selwan to ensure that certain debts owed by Kimberley became vested in entities controlled by persons on whom they could rely, with each such entity making no financial outlay and incurring no financial risk and being willing to give a proxy to Mr Lorentz or Mr Burke. The assignees made the proxy appointments as part of the plan conceived and executed by the directors and secretary of Kimberley to obtain control of the voting power attached to the assigned debts.
54 The case was argued on the footing that the Selwan procured creditors such as Mushroom Catering became assignees of the debts owed by Kimberley to the external creditors such as Taren Constructions. But, of course, the money paid to the several assignees was Selwan's money and it was paid by Selwan. That is indicative of a purchase by one person in the name of another, so that the second person holds as a nominee upon a resulting trust for the first person as the real purchaser.
55 Mr Lorentz offered no real explanation when asked why Selwan, having paid the external creditors, did not itself become the assignee of their debts: see the latter part of the transcript extract at paragraph [41] above. The real reason is not difficult to see. Creditor status for Selwan itself would have been counterproductive when it came to the matter of acquiring voting power for the purposes of a Part 5.3A meeting. In the first place, Selwan was "a related entity" of Kimberley, so that any votes it cast as a creditor could immediately have been called into question by reference to s 600A(1)(b). Second, for all five external debts to be assigned to Selwan would have produced only one new creditor, not five.
56 The true position was that Selwan, a vehicle controlled by Kimberley's directors, purchased the debts of the five external creditors with money of its own but in the names of what were really five nominees; and that it did so to ensure that voting power was ostensibly in the hands of the five nominees but in the knowledge that the nominees, with nothing financially at stake and no reason to take any independent interest, would - or, at least, would be likely to - co-operate with the directors of Kimberley when it came to the matter of voting at any meeting of creditors.
57 The five assignees were, in reality, so aligned with the directors of Kimberley and devoid of interests of their own that, although not strictly within the "related entity" definition in s 9, they were in substance related entities. The transactions involving the five external creditors and the five assignees were, in short, an artifice to give an air of arm's length independence to a device by which voting power at any meeting of creditors was put into the hands of the Kimberley directors, with mere nominees being made to appear to possess the voting power.
58 An essential element of the plan was to enhance the number of votes that could be controlled having regard to numbers of creditors voting. Creditors' voting power, as Mr Lorentz well knew (see the extract from his evidence at paragraph [42] above), had two dimensions to it in the context of a meeting of creditors under Part 5.3A. In order to be passed at such a meeting without the intervention of a casting vote, any proposal had to be approved by creditors representing a majority in number of the creditors voting and a majority by value of the claims (as admitted for voting purposes) of the creditors voting. Mr Lorentz and his colleagues would have had no concern on the matter of value: Lohemi, a company controlled by Mr Lorentz and Mr Stoliar, was represented as owed a sum that exceeded all other possible claims combined. It was at the level of a majority in number (that is, on a head count) that Mr Lorentz and his colleagues had no assurance of success. It was in order to manufacture that assurance that the arrangements with the several assignees were made.
59 In summary, the directors and secretary of Kimberley, acting in their corresponding capacities within Selwan, implemented a strategy deliberately aimed at enhancing their chances of controlling, at the head count level, creditor voting that they already controlled at value level because of the magnitude of the Lohemi debt.
60 Another point must be emphasised. The effect of Selwan's actions was to cause certain creditors of Kimberley (being Taren Constructions and the other assignors) to receive money equivalent to the debts owed to them by Kimberley. True it is that their debts were not paid and that the moneys they received were in the nature of consideration for the assignment of their debts to the Selwan nominees. Taren Constructions, for example, received $1,210 from Selwan and assigned its debt to Mushroom Catering. The assignors thereby ceased to be creditors of Kimberley. They were in the same financial position as if their debts had been paid. It may be assumed, taking again the case of Taren Constructions, that it was indifferent to the precise legal classification of the $1,210 it received. Having received it, Taren Constructions had no further interest in the financial position of Kimberley.
The significance of the cornering of voting power
61 As noted earlier, the motion for the adoption of the deed of company arrangement was supported by 17 creditors accounting for debts of $13,585,530.11 and opposed by five creditors accounting for $5,557,864.89. As also noted earlier, the eleven creditors within the s 600A(3) definition of "related creditor" (accounting for debts of $13,560,291) were among the 17 who voted in favour. The remaining six who voted in favour were Mr Burke (Kimberley's secretary) and the five entities Nos (5), (13), (16), (17) and (20) for whom creditor status was arranged by Selwan and which were in substance Selwan's nominees. The debt of Mr Burke, as admitted for voting purposes, was $1,770. The debts of the five Selwan procured creditors totalled $23,466.
62 Every vote in favour can thus be seen to have been the vote of a "related creditor" (as defined by s 600A(3)), the vote of a Selwan procured creditor (which became a creditor at the instigation of Selwan and without financial outlay of its own) or the vote of the individual who orchestrated the procuring of voting power by Selwan.
63 Had all these votes been ignored, the outcome would have been that there were no votes in favour of the adoption of the deed of company arrangement and that five creditors voted against the adoption.
64 Furthermore, the five creditors voting against would have been seen to be arm's length creditors with substantial debts: Australian Taxation Office (admitted, for voting purposes, at $1,693,081), Arunta Investments Pty Ltd (admitted for voting purposes at $75,706), Building Insurance Guarantee Corporation (a creditor who appeared upon the hearing of these proceedings in support of the plaintiff and who was admitted for voting purposes at $1,587,093), Marcel Ebser (a judgment creditor admitted for voting purposes at $388,077) and Grocon, the present plaintiff (admitted for voting purposes at $1,813,906). The total of the claims of these creditors is $5,557,964.
65 It is instructive to review, in the context of this account of the voting dynamics, the actual operation and effect of the deed of company arrangement. As I have said, the deed fund is available only to creditors who are not directors or "related entities", as defined by s 9 of the Corporations Act - see paragraph [21] above. The debts of creditors who are not directors or related entities are extinguished by the deed upon distribution in full of the deed fund. The debts of all other creditors - that is, those who are directors or "related entities" - remain unextinguished and continue as undiminished obligations of Kimberley notwithstanding the advent of the deed of company arrangement. Of the creditors who voted in favour of the adoption of the deed, all but six (that is, eleven out of 17) were votes of related entity creditors and the remaining six were the vote of Mr Burke and the votes of the five Selwan procured creditors. It was thus the related entity creditors, with the support of Mr Burke and the five Selwan procured creditors, who ensured, first, that the directors and related entity creditors would not participate in the deed fund and would retain their debts in unextinguished and undiminished form; and, second, that the creditors other than directors and related entity creditors (including Mr Burke, for his $1,770, and the five Selwan procured creditors for their total of $23,466) would, for their aggregate claims exceeding $5.5 million, be confined to participation in the deed fund and have their debts extinguished. And, of course, the five Selwan procured creditors did not stand to suffer at all by that treatment as they had been given money equivalent to their debts and had none of their own money at stake.
66 Leaving to one side the five Selwan procured creditors (ostensibly interested to the extent of a combined $23,466 but in fact having nothing at all at stake) and Mr Burke ($1,770), all the creditors whose debts stood to be extinguished by the deed and attract an entitlement to participate in the deed fund voted against the adoption of the deed. All creditors whose debts would continue in unextinguished and undiminished form voted in favour of the adoption of the deed, as did Mr Burke and the Selwan procured creditors.
67 The situation was thus one in which all the creditors who were not related entities, Selwan procured creditors or Kimberley officers and who cast votes expressed, by those votes, a desire that the debts of all creditors without exception should remain unextinguished and should not participate in the deed fund, while the related entity creditors (helped by Mr Burke and the Selwan procured creditors) forced on the generality of the creditors the very position that the first-mentioned group preferred to avoid while, at the same time, retaining that position for themselves. Putting this another way, exercise of the combined voting strength (both as to number and as to value) of the related entity creditors, Mr Burke and the Selwan procured creditors secured for the directors and the related entity creditors as a class and denied to the remaining creditors as a class the outcome that every member of each class who voted on the scheme of arrangement proposal wished personally to enjoy.
68 Leaving to one side Mr Burke and the Selwan procured creditors, no creditor expressed, by the creditor's vote, a wish to see the creditor's own debt subjected to extinguishment and deed fund participation. On the contrary, every such creditor expressed a wish that the creditor's own debt should continue as an undiminished obligation of Kimberley unaffected by the deed. The related entity creditors, assisted by Mr Burke and the Selwan procured creditors, ensured that they themselves enjoyed the result thus desired by all and that creditors other than directors and related entity creditors did not enjoy the result thus desired by all.
Applying s 600A(1)(c)
69 It is pertinent, at this point, to refer to a species of equitable fraud identified by Lord Hardwicke in a passage in Earl of Chesterfield v Janssen (1750) 2 Ves Sen 125; 28 ER 82 quoted with approval by Owen J in Bell Group Ltd v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 70 ACSR 1 at [4860]. His Lordship said at 100:
"Where a debtor enters into a deed of composition with his creditors for 10s in the pound, or any other rate, attended with a proviso that all creditors executed this within a certain period, if the debtor privately agrees with one creditor to induce him to sign this deed, that he will pay or secure a greater sum in respect of his particular debt: in this there can be no particular deceit on the debtor, who is party thereto: but it tends to deceit of the other creditors, who relied on an equal composition, and did it out of compassion to the debtor. This court therefore relieves against all such underhand bargains."
70 This observation of Lord Hardwicke was quoted by Hansen J in Wood v Laser Holdings Ltd (1996) 19 ACSR 245, a case concerning a deed of company arrangement, the facts of which warrant attention in the present context.
71 The resolution of the creditors of Laser approving the adoption of the deed of company arrangement received the support of 22 of the 35 creditors who voted. After elimination of the votes of acknowledged related creditors, there were 18 creditors representing $91,971 in favour and 13 creditors representing $400,729 against. It was established, however, that a company called Sencon (a member of the Stuart Group) had, in Hansen J's words, "purchased the debts of 13 creditors". These 13 included eleven who voted in favour of the deed of company arrangement proposal. One Cookes in fact cast their votes, as proxy. Cookes was a director of Sencon. He was also a director of Laser itself. He wished to promote, with the aid of the deed of company arrangement, a transaction by which the Stuart Group (of which Sencon formed part) acquired control of Laser.
72 A key finding of Hansen J was recorded as follows at 264:
"When Cookes lodged and voted the 11 proxies the impression would have been that in truth there were 11 separate creditors. Of course, from Laser's point of view, there were 11 debts. But as they were owned by Sencon Pty Ltd and the related proxies were held by Cookes those votes too were votes of related creditors for the purpose of s 600A. In the result it is evident that if the votes of related creditors had been disregarded the resolution to execute a deed would have been lost."
73 His Honour also said at 265:
"By not giving Cole [the chairman of the meeting] notice of the purchases, lodging the proxies and not making disclosure to the meeting Cookes, or Sencon Group/Laser and any in this group who attended the meeting and had knowledge, allowed or encouraged a false and misleading impression as to the status of the 11 debts. In substance if not in law there were not then 11 separate creditors, but one creditor in respect of the 11 debts."
74 Hansen J's conclusions with respect to s 600A(1)(c) were stated at 269:
"The question is whether the passing of the resolution was contrary to the interests of creditors as a whole or the class that voted against it (s 600A(1)(c)(i)). In my opinion it was. It was plainly disadvantageous. The alternate question is whether the resolution has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against it to an extent that is unreasonable. In my opinion that requirement (s 600A(1)(c)(ii)) is satisfied: the disadvantage or prejudice is plain and significant in a material sense, the overall benefit is in a real sense only or overwhelmingly for the Stuart Group for its commercial purposes and not for the aid of the creditors as a whole, some creditors were advantaged by private dealings in exclusion of the creditors as a whole, and there are the attendant circumstances of deception of the creditors and the administrator."
75 I would prefer to leave to one side his Honour's conclusion on
s 600A(1)(c)(i). This is because, in my view, when that provision speaks of "that class of creditors as a whole", it does not refer to the "class" consisting of creditors who voted for or creditors who voted against. Rather, the "class of creditors" referred to is that identified in s 600A(1)(a)(ii), that is, a class to which a class meeting convened under Part 5.1 pertains.
76 For present purposes, however, Hansen J's conclusion in relation to s 600A(1)(c)(i) is both relevant and instructive. His Honour's decision was summarised as follows in Bell Group Ltd v Westpac Banking Corporation (No 9) (above) at [4898]:
" Wood v Laser Holdings Pty Ltd (1996) 19 ACSR 245 also concerned a deed of company arrangement. Eleven of the 22 creditors who voted in favour of executing a deed of company arrangement had, prior to the meeting, sold their debts and given their proxies to a person who had been negotiating with the directors to take control of the company. This was not disclosed to the other creditors at the meeting, or to the administrator. The court set aside the deed. Hansen J, at 267, said that what the third party achieved might fairly be described as an 'underhand bargain'. It was selective among the creditors to achieve his own ends and not for the purpose of advancing the best interests of the creditors as a whole. When the votes were taken neither the administrator nor the creditors (other than those who had sold their debts) knew that such sales had occurred, and nor did the administrator. Again, this centres on equality of treatment and is also a common dealing case."
77 In the present case, the passing of the resolution for the adoption of the deed of company arrangement entailed clear prejudice to the five creditors who voted against the resolution. Directors of Kimberley, acting through Selwan, engaged in private and undisclosed dealings with certain creditors of Kimberley in the lead-up to the Part 5.3A administration for reasons which obviously included, as a predominant reason, the enhancement of the voting power at the disposal of Kimberley's officers at the meetings of creditors that would inevitably be held in the course of the administration. That Selwan's funds were outlaid for this purpose shows that Selwan thought it beneficial to see the potential voting pattern altered; and, of course, Selwan had no thoughts other than those housed in the heads of Kimberley officers who were its directors. The interests of the creditors who voted against the crucial resolution eventually placed before a meeting of creditors were prejudiced by the exertion at that meeting of this actual influence of a related entity masquerading as the influence of arm's length parties.
78 There was a second and no less serious way in which the interests of the five creditors voting against the resolution were prejudiced. As noted already, the votes of the acknowledged related party creditors, together with the votes of Mr Burke and the Selwan procured creditors, denied to the five creditors opposing the deed the position they wished to occupy, being a position assured by the deed for directors and related entity creditors. I refer, of course, to the position where debts were not extinguished and there was no right of participation in the deed fund. The five creditors were denied that position by the persons who were themselves to occupy it and associates of those persons.
"Unreasonable" prejudice and the matters in s 600A(1)(c)(ii)(A), (B) and (C)
79 It remains to consider whether the identified prejudice is "unreasonable" having regard to any of the matters referred to in
s 600A(1)(c)(ii)(A), (B) and (C).
80 In Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 34 ACSR 391 at [89], Austin J said that the question of unreasonable prejudice "seems to boil down to whether the creditors are better off with the proposed deed or liquidation, as there is no other alternative on the facts". In the present case, there is, in one sense, no real need for any separate and objective inquiry into that matter. The five dissenting creditors made it quite clear by their votes that they did not want the deed of company arrangement and that, by necessary implication, they preferred winding up.
81 The fact that those five creditors wished to avoid extinguishment of their debts and fund participation pursuant to the deed and that the related creditors, Mr Burke and the Selwan nominees had a precisely corresponding wish brings the matter within s 600A(1)(c)(ii)(A). The related creditors and their associates obviously saw benefits to themselves in standing aside from the scheme of debt extinguishment and fund participation. Had they not seen such benefits, they would not have taken the action that caused the deed to be adopted.
82 If, however, objective inquiry is needed, it readily supports the view that, on the materials before creditors, there was, in an immediate sense, very little difference between winding up and the deed proposal from the point of view of those creditors whose debts were to be subjected to the deed. In a report to creditors dated 20 March 2009, the administrators set out in tabular form their estimated returns to creditors under the proposed deed of company arrangement and in a winding up. There was, in each case, an "optimistic" estimate and a "pessimistic" estimate. In the case of winding up, both "optimistic" and "pessimistic" outcomes were zero. Under the proposed deed, the "optimistic" outcome was 3.96 cents in the dollar and the "pessimistic" 1.18 cents in the dollar - in other words, only very marginally better than zero in each case.
83 The administrators' opinion, as expressed in the report of 20 March 2009 in summary form, was that the proposed deed "is not expected to provide a significant return to creditors" but "may provide a greater and more certain return than a winding up".
84 Any creditor considering this report would have seen quite clearly that, in terms of estimated return, there was very little at all to choose between the two possibilities. Many, if not most, would have taken the conservative view that the deed was probably more likely to yield the "pessimistic" 1.18 cents in the dollar, so that someone with a debt of $10,000 might expect $118 and someone with a debt of $100,000 might expect $1,180. The return, in each case, would be so small as to be negligible in practical terms. No one with an eye to their own financial interests would regard such a return as worth pursuing with any greater vigour than one might expend in picking up a coin found lying on the pavement.
85 One matter covered in the administrators' several reports was the question of possible recoveries by a liquidator in the case of winding up. That is a matter that deserves attention and analysis.
86 The estimates given by the administrators in relation to winding up did not include anything for recoveries a liquidator might make on account of unfair preferences, insolvent trading and other causes of action made available to a liquidator alone. There was reference to possibilities in relation to preference recovery and insolvent trading claims coupled, however, with warnings about uncertainty and expense. The general message was that these avenues might not be productive unless substantial outside financing became available to a liquidator; and that even then, the prospects of appreciable recoveries might be problematic.
87 Mentioned only in passing in the administrators' earlier reports to creditors (there were three such reports in all) was what the second report (20 March 2009) called "a written undertaking from a related party to provide financial assistance". That second report mentioned the undertaking in connection with a reference to Kimberley's accounts having been prepared on a going concern basis. It did so in general terms only.
88 But in the third report to creditors (the further supplementary report of 26 March 2009), the related party is identified as Opportune Pty Ltd. There is evidence that, in each of several recent financial years, Opportune, over the signature of Mr Lorentz as its managing director, wrote to the directors of Kimberley as follows:
"Our company will provide all necessary financial support to Kimberley Securities Limited and it [sic] controlled entities for a period of 12 months from the date of the Directors' Report in order for the Company's and Consolidated Entity's financial reports to be prepared on going concern basis.
We further confirm that Opportune Pty Ltd and/or related Director Companies has the financial resources to provide this undertaking. The cashflow that has been prepared to show the level of funding required is attached to this undertaking."
89 Each such letter was copied to Kimberley's auditors.
90 Under promptings from Grocon's solicitors, the administrators gave creditors details of the Opportune undertakings in the report of 26 March 2009, noting that preparation of Kimberley's annual accounts on a going concern basis was "a result of" the undertaking. They added that the directors of Opportune were Mr Lorentz and Mr Stoliar, two of Kimberley's own directors. The administrators went on to say that they were without resources to obtain legal advice on the enforceability of the Opportune undertaking and that they could not assess the financial strength of Opportune. They referred, however, to an affidavit in other proceedings which "states that Opportune had a negative net asset position in the sum of $3,368,517.83 as at 30 June 2006". There was also reference to management accounts of Opportune to 30 June 2008 indicating "a negative net asset position of $2,596,095.33".
91 The use to which the Opportune undertaking was put is shown by the published financial statements of Kimberly. In the notes to the accounts for the year ended 30 June 2007 (themselves signed on 27 June 2008), it is stated that the accounts have been prepared on the basis that the company and the consolidated entity are "going concerns, which assumes continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business". The notes go on to say:
"The ability of the company and the consolidated entity to pay their debts as and when they fall due and the appropriateness of adopting the going concern basis of accounting are largely dependent upon the ability to secure the ongoing support of the company's major shareholders and the consolidated entity's bankers. As a result significant uncertainty exists as to the ability of the company and the consolidated entity to continue as going concerns and therefore as to the ability of the company and the consolidated entity to pay their debts as and when they become due and payable.
The directors have determined that the going concern basis is appropriate based upon the ongoing support of the company's major shareholders and the consolidated entity's bankers.
If the company and the consolidated entity are unable to continue as going concerns they may be required to realise their assets and extinguish their liabilities other than in the normal course of business and at amounts different from those stated in the financial report."
92 The note just referred to is Note 1(c). The report of the auditors reads in part as follows:
"Without further qualification to the opinion expressed above, attention is drawn to the following matter. As disclosed in note 1(c) to the financial statements, the financial reports of the Company and Consolidated entity have been prepared on a going concern basis, based on the financial support provided by Opportune Pty Ltd, a company owned by Mr Lorentz and Mr Stoliar. Opportune Pty Ltd has agreed in writing to provide all necessary financial support to Kimberley Securities Limited and its controlled entities for a period of 12 months from the date of the Director's report in order for the Company and Consolidated Entity's financial reports to be prepared on a going concern basis. Mr Lorentz and Mr Stoliar have agreed in writing to provide financial support to ensure there will be sufficient funds in Opportune Pty Ltd to honour its financial support to Kimberley Securities Limited."
93 It is thus clear that the Opportune undertaking was of great importance not only in causing the directors of Kimberley to adopt the going concern basis in preparing the company's accounts but also as an element underwriting the auditors' report.
94 Against that background, it is pertinent to quote the following part of Mr Lorentz's cross-examination:
"Q. I am going to stop you there because you have answered my question. Can I move on to the next one. Your position as director over that period of time has meant that you have regularly had to read the financial statements?
A. Yes.